Manager Research

The JSE launched several new property indices in October last year in an effort to address discontent amongst stakeholders in the sector. The listed property market has grown substantially over the last 15 years and the market has become much more liquid, property counters have specialised (think Stor-age) and assets are increasingly invested offshore. The concern is therefore that the SA Listed Property Index (SAPY), which launched in 2004, is no longer representative of the investable universe available to local investors.

SAPY consists of the Top 20 most liquid listed property shares by free float market cap in the Real Estate Investment & Services sector or any of the REIT sectors, which have a primary listing on the JSE. Because property fund managers in SA typically manage very benchmark aware processes, using SAPY is problematic: Firstly, constituents aren’t capped so Growthpoint, Redefine and Nepi combined represent half the index. Secondly, because only the top 20 most liquid counters are included the index excludes over a third of the property counters on the All Share Index (which consists of 33 property shares). Thirdly, the index excludes large dual-listed shares like Hammerson, Capital & Counties, Intu and Redefine International due to their primary listings being overseas.

To address these concerns, the JSE launched three new indices, in addition to keeping the two old indices:

We recently reviewed several property fund managers and the majority of them have either already started changing or have indicated their intention to change to the ALPI in the next few months. Owing to the differences between the indices and the fact that the typical property fund manager uses the benchmark as a starting point, we view these changes as material and something that investors should be keenly aware of. Here is a summary of the changes:

A positive aspect of using the All Property index is that the universe is larger and more diverse which should be a boon to liquidity. Theoretically, this enables managers to be nimbler and more active. The index is also capped, which reduces concentration risk and prevents a share like Growthpoint from growing to 21% of the index, as it is in SAPY.

Our primary concern with the new benchmark is the larger offshore exposure. SAPY had no offshore exposure as little as ten years ago in comparison to 38% today. The ALPI’s see-through exposure to offshore is even higher at almost 50%.

This causes several problems for investors. Firstly, listed property becomes influenced by foreign business cycles and dislocates from the SA business cycle. Secondly, most of the offshore investment is in Europe where inflation and interest rates are lower (including Poland). Consequently, the real return expectation on property as well as income yields decline. Lastly, the historic relationship with other asset classes start to change. Property has historically been highly correlated to other yielding assets like local bonds, which are inversely correlated to the currency. With 50% of the index now invested offshore, property becomes more closely related to the currency and the correlation between property and bonds break down. This impacts the way property is used in a portfolio.

Overall the developments will likely increase differentiation in the fund offering investors have to choose from. The important thing is for investors to understand what is being offered, because this is no longer just a vanilla SA property sector and the dynamics have changed.